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Royal Dutch Shell plc: Let the Asset Sales Begin

With plans to divest as much as $15 billion in assets over the next two years, Shell has entered into a major divestment phase.

Arjun is a value-oriented investor focusing primarily on the oil and gas sector, with an emphasis on E&Ps and integrated majors. He also occasionally writes about the US housing market and China’s economy.

Royal Dutch Shell(NYSE:RDS.A), Europe's largest oil company by market value, is planning to significantly accelerate its pace of asset sales this year and next as it aims to keep spending in check. The asset dispositions appear to have begun in full force, with the company having already announced three major sales this month.

Offshore Brazil sale On Wednesday, the Anglo-Dutch oil giant announced it has agreed to sell a minority 23% interest in an offshore Brazilian project to state-owned Qatar Petroleum International for approximately $1 billion.

Shell, which acquired the 23% stake in the deepwater project known as Parque das Conchas (BC-10) from Brazil's Petrobras(NYSE:PBR) last year, will remain the project's operator. After the sale closes, pending approval from Brazil's oil and gas regulator, Shell will have a 50% working interest in the project, which is currently producing approximately 50,000 barrels of oil equivalent per day.

The company's announcement follows two other major asset sales this month, including the sale of its stake in a gas project in Western Australia and its stake in a major U.S. crude oil pipeline.

Wheatstone LNG and Ho-Ho pipeline sale On January 20, Shell announced plans to divest its 8% interest in the Wheatstone-Iago Joint Venture and its 6.4% stake in the Wheatstone liquefied natural gas (LNG) project to the Kuwait Foreign Petroleum Exploration Company (KUFPEC) for roughly $1.135 billion in cash.

Wheatstone is currently being developed offshore of Western Australia's Pilbara region and will have a total capacity of 8.9 million tonnes per annum (MTPA) after it goes into service in 2016. Chevron(NYSE:CVX) maintains a 64.14% interest and serves as the project's operator, while joint venture partner Apache(NYSE:APA) holds a 13% stake, and state-owned KUFPEC will have a 13.4% interest after Shell's sale closes.

Shell is also looking to downsize its Australian downstream business because of weak margins and heavy competition. It's currently seeking a buyer for its 900 petrol stations in the country and its 120,000 barrels-per-day Geelong refinery in Victoria. Peer BP(NYSE:BP) is also considering the sale of its Australian petrol stations, as well as refineries in Queensland and Western Australia. Shell may also part ways with its 23.1% stake in Australia's Woodside Petroleum(ASX:WPL), according to some analysts.

Lastly, Shell also plans to sell a stake in the Houston-to-Houma, or Ho-Ho, crude oil pipeline and has tapped Barclays(NYSE:BCS) to find buyers for its stake, which is worth as much as $1 billion, Bloomberg recently reported. By selling its stake, Shell hopes to recover the cost incurred in reversing the direction of the line's flow, according to people familiar with the matter. It is also seeking to monetize part of the pipeline to raise funds that can be invested in more profitable exploration and production projects.

Will asset sales prove successful? It looks like Shell has definitely entered a major divestment phase. The company has come under tremendous pressure from shareholders who are worried about its high level of capital spending relative to its cash flow, which could impact the company's ability to sustain its hefty dividend. Last year, its net capex spending came in at $44.3 billion, about $5 billion more than initially expected, while operating cash flow was only $40.4 billion.

However, Shell expects to reverse this trend through a combination of $15 billion in additional asset sales, and the start-up of a handful of high-margin oil projects, including Mars-B and Cardamom in the Gulf of Mexico, over the next two years. The start-up of new projects should help boost cash flow between 2012-2015 to $175-200 billion, while asset sales should help keep net capex spending at around $130 million.

If Shell is successful with its asset sale program over the next two years, and if it can avoid further cost overruns and delays at its various megaprojects, the company should be able to meet its targeted spending goal through 2015. Going forward, it has pledged to concentrate only on its highest-return opportunities adjusted for risk, which should help gradually improve its return on capital -- an area in which it has sorely lagged its peers over the past few years.